Consider three bonds with 5.3% coupon rates, all making annual coupon payments a
ID: 2713583 • Letter: C
Question
Consider three bonds with 5.3% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. a. What will be the price of each bond if their yields increase to 6.3%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) bond price 4 yrs ? 8yrs ? 30 yrs ? b. What will be the price of each bond if their yields decrease to 4.3%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) bond price 4 yrs ? 8yrs ? 30 yrs ?
Explanation / Answer
Consider three bonds with 5.3% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. a. What will be the price of each bond if their yields increase to 6.3%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Years 4 yrs 8yrs 30 yrs Bond price ? ? ? b. What will be the price of each bond if their yields decrease to 4.3%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Years 4 yrs 8yrs 30 yrs Bond price ? ? ? Solution: a. & b. Price of Each Bond at Different Yields to Maturity is calculated below : Maturity of Bond Yield 4 Years 8 Years 30 Years 4.3% $1,039 $1,035 $1,013 5.3% $1,000 $1,000 $1,000 6.3% $1,067 $1,071 $1,093 The price of the bond at the end of the year depends on the interest rate at that time.